Mortgage Borrowing and the Boom-Bust Cycle in Consumption and Residential Investment

Xiaoqing Zhou

No 2103, Working Papers from Federal Reserve Bank of Dallas

Abstract: This paper studies the transmission of the major shocks in the U.S. housing market in the 2000s to consumption and residential investment. Using geographically disaggregated data, I show that residential investment is more responsive to these shocks than consumption, as measured by elasticities and the implied contributions to GDP growth. I develop a structural life-cycle model featuring multiple types of housing investment to understand the large responses of residential investment. Consistent with the microdata, the model generates lumpy debt accumulation, lumpy housing investment and a strong correlation between mortgage borrowing and housing investment at the early stage of the life cycle. In the model, households move up the property ladder by increasing their mortgage debt after they have accumulated enough home equity. Since liquidity constraints and fixed costs prevent especially young homeowners from acquiring their desired home, shocks to their borrowing capacity have a large impact on residential investment.

Keywords: Mortgage borrowing; Consumption; Residential investment; House price; Mortgage rate; Credit supply; Business cycle (search for similar items in EconPapers)
JEL-codes: D1 E2 E3 (search for similar items in EconPapers)
Pages: 71
Date: 2021-03-24
New Economics Papers: this item is included in nep-dge, nep-mac and nep-ure
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Journal Article: Mortgage borrowing and the boom-bust cycle in consumption and residential investment (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:feddwp:90498

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DOI: 10.24149/wp2103

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